Taxpayers can ease the pain of preparing tax returns simply by knowing the Internal Revenue Service's (IRS) definitions of certain significant terms that have major impacts on taxable income. Some of the most important accounting terms for taxpayers to know include gross income, adjusted gross income and modified adjusted gross income (MAGI).

Gross Income

An individual’s gross income is simply his or her total earnings, not otherwise exempt from taxation, throughout any given year. Wages, salaries, commissions and net business income are included in the gross income tally, and this number is used to determine whether an individual needs to file a return or if a person can claim an individual as a dependent. If gross income is less than a certain amount, filing a tax return may not be necessary.

Adjusted Gross Income

An important accounting figure helpful in determining an individual’s total taxable income in a given year is adjusted gross income. This figure is determined by subtracting adjustments, or above-the-line deductions, from an individual’s gross income. Adjustments can include traditional IRA contributions eligible for deduction; qualified retirement plan contributions; payment of alimony; and interest paid on student loan balances. For the self-employed, health insurance premiums and one-half of self-employment taxes paid throughout the year also affect adjusted gross income.

The adjusted gross income calculation is important to an individual’s tax return as it is used to determine a person's eligibility to take additional deductions to further reduce taxable income. Both state and federal tax preparations require the calculation for adjusted gross income to be completed properly to determine further deduction eligibility.

Modified Adjusted Gross Income

Where most taxpayers get confused in preparing their tax returns is the process of calculating modified adjusted gross income. This figure differs from adjusted gross income in that some adjustments are added back in to the total. These adjustments can include tuition costs and education deductions, any eligible IRA contributions, losses from rental properties and interest paid on student loans. Self-employed individuals need to add back in half of self-employment taxes paid as well. The MAGI is used to determine whether certain deductions are allowed, including contributions to an individual retirement plan.

For most individuals, adjusted gross income and MAGI are similar; however, both must be calculated to determine total taxable income for any given year. Regardless of whether an individual receives a W-2 or is self-employed, understanding the differences between gross income, adjusted gross income and MAGI is a necessary aspect of filing a correct tax return. The majority of tax preparation software programs perform these calculations behind the scenes, but individuals can more accurately estimate total tax obligations for the year when they have an understanding of these income terms.

  1. What is the Difference Between Gross Income and Earned Income?

    The difference between earned income and gross income is an important one come tax time. Read Answer >>
  2. What is the difference between taxable income and gross income?

    Understand the basic differences between the terms gross income and taxable income, and what is included in the total of ... Read Answer >>
  3. What is the difference between MAGI (modified adjusted gross income) and adjusted ...

    Understand the difference between adjusted gross income and modified adjusted gross income and the effect each has on personal ... Read Answer >>
  4. What is the difference in tax liability between gross income and other kinds of income?

    Find out how the U.S. government taxes worker's earnings, whether it is gross income or income exempted or excluded from ... Read Answer >>
  5. What are some good free online calculators for AGI (adjusted gross income)?

    Learn specific information about adjusted gross income and modified adjusted gross income and where free online calculators ... Read Answer >>
  6. What is the difference between comprehensive income and gross income?

    Learn the specifics of both comprehensive income and gross income, how they are legally defined, and the primary difference ... Read Answer >>
Related Articles
  1. Taxes

    How To Calculate AGI For Tax Purposes

    The first step in completing your taxes is calculating your adjusted gross income. Here’s how.
  2. Investing

    Understanding Gross Sales

    Gross sales represents the overall revenue of a company through its sales activities.
  3. Taxes

    How To Calculate AGI For Tax Purposes

    Determining your adjustable gross income is essential in the tax filing process. Here are some tips for doing so.
  4. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  5. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  6. Taxes

    Smart Year-End Tax Moves for 2016 (Part Two)

    Here's are some crucial tax planning strategies for investments, Social Security and Medicare.
  7. Taxes

    Countries with the Highest Income Taxes

    Before you move to one of these countries with the highest income taxes, think through the overall tax situation - and what you get for your money.
  8. Taxes

    How The Wealthy Slash Their Income Tax Bills

    Many of these tax-minimization strategies can be used by anyone. Find out how you can pay taxes like a millionaire.
  9. Personal Finance

    The Ultimate Tax-Time Checklist

    Find out what information you need to pull together before filling out your return.
  10. Taxes

    Which Countries Have the Highest Taxes on High Incomes?

    These countries charge the highest taxes on high incomes.
  1. Adjusted Gross Income - AGI

    A measure of income calculated from your gross income and used ...
  2. Gross Income

    1. An individual's total personal income, before accounting for ...
  3. Gross Earnings

    1. For individuals, the total income earned in a year, as calculated ...
  4. Modified Adjusted Gross Income - MAGI

    The amount of income that determines how much of an individual's ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross ...
  6. Net Investment Income (NII)

    Net investment income is income received from investment assets ...
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center